The Reserve Bank of Australia cut interest rates by 25 basis points to a historic low of 2.00%. This move was expected by forex traders may have surprised Glenn Stevens, the Governor of the RBA, and other central bankers as the Australian Dollar staged a rally despite the cut in interest rates. The RBA was hoping to push the Australian currency lower in order to make exports more attractive to major trading partners; a move which backfired.
Several economic reports have been released out of Australia as well as China which support a widespread global slowdown. Prior to the announced interest rate cut another report was released which showed that the Australian service sector contracted in April. The AiG Performance of Services Index showed a level 49.7. This was an unexpected disappointment, but forex traders focused their attention on the statement which accompanied the RBA cut in interest rates.
The cut in interest rates down to 2.00% is the lowest it has ever been, but those who are speculating on more cuts are better off to change their approach as the statement basically put an end to the interest rate cuts by the RBA which is the main reason forex traders bought the Australian Dollar. The ‘implicit easing bias’ has been removed and a period of no change should be expected while the next move by the RBA is certainly to be an increase in interest rates.
The three-year Australian bond yields are now trading above the cash rate. Glenn Stevens has cited falling commodity prices and weak investment as the cause for the cut. Mortgage holders will have more cash at the end of each month as the cut in interest rates equals to saving of $74 per month on a $500,000 mortgage. The lack of investment is a big concern and retirees who are dependent on their savings in the bank may suffer the most.
It remains to be seen if the cut in interest rates will translate into an increase in economic activity by consumers. Governor Stevens did mention spare capacity and as much as the RBA would favor a weaker Australian Dollar, forex traders have delivered quite the opposite; at least for now. The Australian economy is struggling just like other economies, but the extend of the suffering won’t be known until much later. The RBA interest rate cut has opened some great trading opportunities.